Keep Calm And Carry On? Better Coordinaton On Regulation Needed

Every day brings new revelations of serious failures of corporate governance followed by further fines on banks and the wider global financial services sector.

There are those in the UK who argue that the scandal tainted financial markets barely have time to draw breath, let alone try to clean up the wrongdoing, address deep-seated issues of culture in organisations and redefine their businesses.

It is proving increasingly difficult, they argue, to 'Keep Calm And Carry On' in the great tradition of the motivational posters issued by the British Government in 1939 before the second World War. Where there are social gatherings of non-executive directors with a seat in financial sector boardrooms, there is a great deal of muttering about the impossibility of 'carrying on' amid swathes of 'regulation'.

The UK government is also fighting a dual battle: to clean up the reputation of the City, and to make it clear that it is doing so without being made to by the European Union (EU).

Last week the UK government gave regulators oversight over seven key financial market benchmarks - including oil, precious metals and foreign exchange- as it announced a consultation designed to bring in a new regime. This 'Fair And Effective Markets Review' is led by Minouche Shafik, the new female deputy governor of the Bank of England, alongside Martin Wheatley, the CEO of the Financial Conduct Authority (FCA) and the UK Treasury.

The FCA also held discussions with each of six major banks -
Royal Bank of Scotland, HSBC,
Barclays, Citi,
UBS and JP Morgan - last week to warn them that they faced multimillion-pound penalties that could exceed the £160m (to date the biggest UK fine) levied on the Swiss bank UBS for the rigging of Libor.

But it was earlier in the week - September 23rd - that the messy nature of the current state of affairs on regulation became ever more apparent.

On September 23rd, the day that Barclays was fined £38m - the highest ever fine imposed by the FCA - for putting £16.5bn of client assets at risk, Andrew Bailey, a deputy governor of the Bank of England, made a speech. In it he called for better co-operation with US regulators over the scale of fines being levied on banks in order to ensure such fines do not weaken their financial position.

“I am trying to build capital in firms and it’s draining out the other side (in fines and penalties),” he said at a banking conference.

Yet in the UK's own announcement of the Barclays fine, for example, it was very clear that it was higher than before as safeguarding client assets is seen to be the very essence of good corporate governance.

David Lawton, FCA director of markets, said: "Safeguarding client assets is key to maintaining market confidence if firms fail - Barclays lack of focus on the rules was unacceptable. Our on-going scrutiny of firms’ compliance reflects the importance of the regime, which protects custody assets worth £10 trillion held in the UK.'

"Barclays failed to apply the lessons from our previous enforcement actions, numerous industry-wide warnings, and exposed its clients to unnecessary risk. All firms should be clear after Lehman that there is no excuse for failing to safeguard client assets" added Tracey McDermott, FCA director of enforcement and financial crime.

To make matters worse, to much of a watching but jaded UK general public, the levels of fines in the financial sector do not seem nearly punitive enough to bring about any significant change in corporate behaviour. If the final goal is the restoration of trust, then the reduction of financial penalties would hardly seem to be the answer.

Business is certainly bracing itself for more of the same. "This fine should serve as a stark warning to firms that they need to be aware of both the existing and new rules covering client money and assets. Safeguarding client assets is key to the FCA’s objectives and it is no surprise that we have seen a string of fines from the regulator. We expect further enforcement action to be taken where failings are identified" says Lorraine Bay, partner at professional services firm MooreStephens regarding the Barclays fine.

But, she adds that while regulation is clearly being driven by Europe, a certain "lack of co-ordination" has resulted in confusion around client accounts - for example in jurisdictions that do not recognise 'trust' status. "It is clear that from a regulation perspective, the regulators are all going to have to talk to one another, and have a more co-ordinated approach" she says.

At the Bank of England, Ms Safik said, writing in the Financial Times: "A key part of our work will be to propose a clear new set of standards for the fair and effective operation of these markets, and suggest ways in which behaviour can be better aligned with those standards. We cannot achieve this alone. These markets are global in scope, so we will need to work closely with our international partners to develop proposals that can be adopted in all jurisdictions."